In Defense of the National Debt

An out-of-control debt is a potential catastrophe; no debt may be even worse

Exhibiting activity more frenetic than a nest of drugged-up ants besieged by a pack of crazed anteaters, the Washington politicos have created a phony financial crisis over the increase in our allowable national debt. Their objective is to set themselves up as the heroic cavalry riding to our rescue in the nick of time. As if that were not bad enough, like an infestation of tempestuous termites, the Congressional delegation of Tea Partiers is eating away at the very nature of how our government has functioned for over 200 years.

Getting the Facts Straight

There is a financial challenge facing America, but it is not nearly as perilous or complicated to resolve as the politicians and their co-conspirators in the media would have us believe. The politicians in Washington desperately want us to believe and fear a national debt as a scourge on the future of children. The Tea Party members, who exhibit about as much common sense as termite do-do, want us to believe that any compromise in dealing with the debt is worse than the debt itself.  It is that sort of fanatical posture that obscures the truth, which is this: The financial crisis facing the country is not about debt; it is about the irresponsible way that debt has been incurred and is managed.

It was Michael “Gordon Gekko” Douglas who famously said in the movie Wall Street, “Greed, for lack of a better word is good! Greed is right! Greed works! Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” In that same spirit it could be said that debt, for lack of a better word, is good. Debt works! Debt is efficient. Debt captures the essence of the spirit of what can be and makes the future more accessible and better. Greed itself is a natural stimulator and motivator; it’s the excesses of greed that are bad. Debt itself is a natural multiplier and tool to do better.

The Political Argument

The politicians – especially the Tea Party puppets – simplistically argue that we should not incur any additional debt and should pay off what we owe, because all debt is bad. But, that is ignorantly wrong-headed. Debt is not, in and of itself bad, it is the abuse of debt that is bad. The reality is that because of responsible and efficient use of private and public debt, American families enjoy the highest standard of living in history. The American economy is the largest in the world, and America has become a world power.

Think for a moment what your family’s living standard and life style would be if debt did not exist. What type of car would you be driving if you had to pay cash for it? What style of home would your family be living in if mortgages did not exist and you were required to pay cash? What are the chances that your kids could attend the very best colleges if student loans were not available to help with tuition? How would your family be impacted if the car breaks down or a new washing machine is needed, but they can’t be fixed or replaced until there is enough money in the checking account to pay cash? If we were forced to go through life without access to credit (debt) then our living standard and life style would be significantly reduced.

And what is true for our personal economies is true for our national economy. A strong, efficient and effective government needs public debt to maintain its position of world leadership.

Lessons from Europe

The British government was the first modern country to use public debt to build an empire and stimulate its national economy. In the 1690s the British government established the Bank of England (which functioned similar to the modern day Federal Reserve System of the US) to finance public debt. During the 18th century the public credit created by the Bank of England funded both the commercial and military growth of the British Empire. At the same time, bonds issued by the British government to fund the debt stimulated the domestic economy since the bonds could be used as collateral for loans to expand business.

One of the primary objectives of those who wrote the US constitution was to create a strong, credible, central government that was capable of taking on public debt to fund what they envisioned as the potential for internal economic growth and the political and economic dominance of America in the world. Almost to a man, the Founding Fathers envisioned the United States not as merely a new country freed from British rule locked in an agrarian economy, but as a country destined to supplant the English as the dominant commercial and political power in the world.

Thus, Alexander Hamilton, acting as the first Secretary of the Treasury, used the newly formed Bank of New York to fund public debt and worked to empower the new government with authority to raise revenues in order to establish the credibility of the government to make good on its debts. These actions immediately stabilized the financial markets and established America as a sound credit risk. As with the British in the 18th century, public debt backed by “the full faith and credit” of the American government became an essential tool to fund the formation of the great American political and economic empire of the 19th and 20th centuries.

It’s important to note that during this period, the national debt was seldom an issue because Congress made sure that revenues were sufficient to match the obligations of the debt, even in times of war. The country emerged from the Civil War, for  example, virtually debt free.  That’s because for the first time in the our history income taxes were levied to pay for the war. That’s a far different legislative mentality than what existed during the Viet Nam, Iraq and Afghanistan wars when the costs of war were funded with debt, but with no parallel increase in revenues to cover the cost.

So, it is not debt that is a bad thing for families or the government, but it is the abuse of that debt in the sense of how it is used, incurred and funded that can create disastrous results. In the case of the British government, it used public debt to finance its empire and stimulate manufacturing AND it enacted a specific tax on spirits that was set aside to repay its public debt over time. Likewise, when Hamilton convinced Congress to assume the debts of the states created during the Revolution, he also requested a tax on imports in order to fund the debt. (Such a tax also served as a stimulus for the development of American manufacturing.) Both the actions by the British and American governments created confidence among investors and opened the door to continuing funding. For families and governments alike, the secret to managing debt is to fund it properly by setting aside revenues at regular intervals to service interest and eventually pay it off.

Fast Forward to 2011

When it comes to our government debt, it has been the constitutional responsibility of Congress to regulate and protect the credibility of debt assumed. For most of our history, Congress has done a good job controlling the appropriateness of debt assumed and raising revenues to meet its obligations. That is the reason why US government debt instruments have, for over a century, been viewed as virtually risk free.

But recent irresponsible actions of Congress have created a significant risk that the confidence in American debt will deteriorate. In an effort to remain in power and pander to the electorate, Congress some 50 years ago began to seek the benefits of debt, without implementing parallel plans to repay for them. And the fallout from this failure of fiscal mismanagement has brought us to the very brink of debt default.  And if that happens,  all of us will be negatively impacted in some way.

The road to this abysmal state has been littered with malfeasance and nonfeasance. Our debt management capabilities have so deteriorated that now nearly half of our new debt is incurred simply to stay current with payments on our old debt thereby creating a national debt Catch 22:

 If we don’t increase the debt limit we won’t be able to take on new debt to pay the old debt and if we default on the old debt, we won’t be able to raise new debt to keep going.

Obviously, this is frustrating and it is what gives rise to movements like the Tea Party, but their “solution” to paralyze government and reject all debt will do more harm than good. What is needed to work out of this crisis is more fiscal discipline going forward. The general Republican plan to solve the problem by simply reducing expenses, without any increase in revenues is only half the answer and will actually make the situation worse. The simplistic philosophy that any debt is bad will, if carried to its extreme, does more to damage the future of this country than the current unfunded debt. What is needed is a fundamental approach which requires that if we want to fund infrastructure, develop new sources of energy, provide health care for all citizens or fight a war, it is okay to do so with debt, so long as we are willing to identify, collect and allocate a defined stream of revenue to pay the debt. It is the way we always ran our government and should do so again.

We can’t reduce or ignore the current debt – which is basically unfunded – because the money has already been spent. To assure that the current debt will be manageable and that the creditors remain confident in the “full faith and credit” of our government, additional revenues will be needed. It may be painful but is necessary medicine for past financial irresponsibility.

And the moral of the story …

There is a simple, proven formula for families and governments to follow if debt is to be a tool for growth as opposed to an instrument of destruction: Debt is never assumed unless there are identified resources available and a plan to repay it.

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